Description

LABP is an illiquid biopharma company that is the subject of a takeover offer from AbbVie (ABBV) since 3/25/2024. Shareholders will receive $20.42 in cash along with a CVR with a payout of upto $11.14 in case they hit milestones -- hence investors can purchase this CVR today for $1.08 with a potential payout of >$11/share, a >10:1 risk-reward - the deal is expected to close in Q2 2024

Under the terms of the agreement, AbbVie will acquire Landos at a price of $20.42 per share in cash upon closing, or approximately $137.5 million in the aggregate, plus one non-tradable contingent value right per share with a value of up to $11.14 per share, or approximately an additional $75 million in the aggregate, subject to the achievement of a clinical development milestone. The proposed transaction is expected to close in the second calendar quarter of 2024, subject to customary closing conditions, including approval by Landos' stockholders.

The CVR is not expected to trade post closing, so this is suitable only for personal accounts or specialized investors that can hold illiquid non-mark to market securities in their portfolio, which is part of why I beleive it is so mispriced (though am just a tourist in the space). 

See below details on what needs to happen to hit the milestone - it appears that ABBV requires their lead asset to initate Phase 3 trials in the next 5 years for the CVR to payout 

While no guarantee can be given that any proceeds will be received, each CVR represents a non-tradeable contractual contingent right to receive $11.14, without interest and subject to applicable tax withholdings (which we refer to as the “Milestone Payment”), upon the initiation of the first Phase 3 clinical trial for a pharmaceutical product containing or comprising NX-13 with a specified formula, and derivatives thereof, or any other molecule, compound or agent directed to a NLRX1 pathway ligand compound that is controlled by Landos for the treatment of ulcerative colitis (the “Milestone”) prior to March 31, 2029 (the “Milestone Achievement Outside Date”).

NX-13 is currently in a Phase 2 proof-of-concept study with top-line readout expected in Q4 2024, so there should be sufficient time for Phase 3 trials to be initiated before the outside date should Phase 2 data prove promising. The company revealed  data from 1B trial in a journal which reported encouraging results back in November 2023

https://ir.landosbiopharma.com/news-releases/news-release-details/landos-biopharma-publishes-results-nx-13-phase-1b-study

The publication, titled "The Safety, Tolerability, Pharmacokinetics and Clinical Efficacy of the NLRX1 agonist NX-13 in Active Ulcerative Colitis: Results of a Phase 1b Study(opens in a new tab)”, reports the results of the Phase 1b trial which included 38 patients randomized to placebo (n=5), 250mg immediate release (IR) of NX-13 (n=11), 500mg IR of NX-13 (n=11) or 500mg delayed release NX-13 (n=11). NX-13 was found to be well tolerated in all patients studied. No deaths or severe adverse events were reported and all adverse events were mild to moderate.

The majority of patients treated with NX-13 for four weeks showed consistent and rapid clinical improvement in total Mayo score and in symptoms relief (as measured by rectal bleeding and stool frequency). Additionally, the endoscopic improvement observed correlated closely with symptoms improvement.

It seems like the CVR payout odds are linked to odds of Phase 2 success/key driver of CVR value. While it is possible/likely that AbbVie during the due-diligence process had additional insight into what Phase 2 data will look like here, if we look at base-rates across auto-immune indications, about ~46% of Phase II drugs make it to Phase III. Given positive signalling by Abbvie, the real odds of NX-13 are likely to be higher, say 50-60%

https://www.acsh.org/news/2020/06/11/clinical-trial-success-rates-phase-and-therapeutic-area-14845

Assuming Phase 3 trials are initiated by 2026/2027, this would imply an NPV using a 10% discount rate to be $4.6-$6/share assuming a 50-60% odds of success - hence fair value is more like $25-26.4/share rather than the $21.5 that LABP trades for today, which is a lot of raw upside for a deal with low-risk that should close in 1-2 months (16-23% upside, IRR >100%). 

Risks:

Abbvie walks away 

Drug fails Phase 2 trials

Abbvie delays Phase 3 trials to start after CVR deadline

Given the pharma business model of buying bio-tech companies and bringing them to commercialization, I think risk of a well capitalized buyer like ABBV walking away is low/de-minimis. I don't expect regulatory scrutiny on the deal given size, and have a positive view on P-II odds of succcess given positive signalling. Given the long-deadline, I don't see it as being in ABBV's interests to delay Phase 3 trials and expect them to payout the CVR honestly if the drug succeeds in Phase 2 trials 

Catalyst

Deal closing 

Positive Phase 2 data

Initiation of Phase 3 trials